Cap and Trade: Why Grandfathering Sucks

Posted by Clark Williams-Derry

01/02/2008 11:30 AM

Here's why grandfathering is such a terrible idea:

The UK's biggest polluters will reap a windfall of at least £6bn from rising power prices and the soaring value of carbon under the new European carbon trading scheme...

Critics argue...that the scheme, under which nearly all allowances are granted free of charge rather than having to be bought by big polluters, has created a distorted market in which the worst offenders will enjoy bumper profits while incurring no extra underlying cost for producing greenhouse gases.

That's just about right: handing out pollution rights for free, as the European emissions trading system did, creates the potential for massive, unearned windfall profits. Permits will have a market value -- someone will want to buy them. So when we hand out emissions permits at no cost, we're essentially handing out free money.

There may be a few exceptions to this rule -- that is, a few economic sectors where free allocation won't lead to windfall profits. But they're the exceptions. The rule (as demonstrated in Europe) is that grandfathering is great for polluters, and bad for consumers.

So maybe that's why lots of big oil & coal companies are so supportive of grandfathering...

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Comments

Posted by Morgan Ahouse 01/02/2008 01:24 PM

Clark, I haven’t been following developments in the WCI very carefully, as I think you have been, so I’m not sure of the exact position Ecology is taking on grandfathering. Still, I’d be very surprised if Washington doesn’t resist it. What’s the update there?

I have been following the Governor’s Climate Advisory Team . While their draft interim report currently states: “The market should also be equitable, and avoid creating artificial financial windfalls within and across sectors, and between producers and consumers” (p 26), I’m disappointed they didn’t take a position on grandfathering in specific. It is my understanding, though, that agricultural companies like Weyerhaeuser are advocating for credits from forests and wood products.

btw, the draft interim report is available for comment through January 10th.

Posted by John 01/03/2008 04:08 PM

Not sure the criticisms are valid. The power companies will indeed be allocated permits free but only up to a level. They will need to buy in permits above this amount. Making the power companies pay for 100% would put them out of business. What people need to realise is that it all comes down to the power price. The price for electricity in US and Australia is far cheaper than EU. Within the EU, there is a wide variation in prices with France the cheapest and Italy almost double France. So give the power companies some permits, have them bud on some as well, but they will need to buy in permits for the shortfall; see www.carbonoffset.net.au

Posted by Alan Durning 01/04/2008 10:07 AM

John,

The only way 100% auction in North America would put power companies out of business was if they couldn't pass on the price increase to consumers. But surely regulators will allow that--since that's how cap-and-trade is supposed to work.